Of the nine canons of taxation, Adam Smith, a famous Scottish economist and philosopher is credited with having developed four. These canons have since become widely accepted as the guiding principles in tax policy, legislation and administration across the Globe. The four canons attributed to him are; equality and equity, certainty, economy, and convenience.
The basic tenet of the canon of equality and equity is that tax should be imposed in such a manner that its burden is borne on the basis of equal sacrifice by taxpayers. The Constitution of Kenya has adopted the spirit of this canon in Article 201 which requires the burden of tax to be shared fairly. The canon of certainty provides that a tax obligation should be clear on what is taxable, the amount of tax payable, and when the tax amount falls due. The canon of economy requires that the cost of collecting taxes should not be so high as to make the exercise meaningless. The canon of convenience requires that tax should be collected in such a manner that provides the greatest convenience for the taxpayers in meeting their obligations. The more convenient it is to pay tax, the more taxpayers are likely to comply.
To give credit where it’s due, Kenya has, to a great extent adopted these canons of taxation. There is however a case to be made that persons who are in employment, carry a heavier burden than other taxpayers which contravenes the canon of equality and equity. The Kenya Economic Survey 2018 indicates that Pay as You Earn (PAYE), which is tax on employment income, is the second highest source of government revenue after Value Added Tax (VAT), contributing over KShs 300 billion to the exchequer annually. According to the survey, only about 6% of the Kenyan population is in wage employment which would mean that employees are contributing a disproportionate amount of the government revenue. In addition to PAYE, employees also contribute to government revenue through other taxes such as VAT, Import Duty and Excise Duty.
This also means that informal sector which according to the survey employs 80% of the country’s workforce remains largely untaxed. The main reason for this is that the Government has not developed a mechanism that satisfies the canon of economy for collecting taxes from this sector. In the case of employees, taxes are easily collected as they are deducted by employers with little input from either the Government or the employees.
A big factor of employees paying a higher proportion of their income in taxes is that employment income enjoys negligible deductions when compared with other incomes. Companies are allowed a wide range of deductions from their gross income, including capital allowances on motor vehicles, rent, telephone and internet expenses, all of which are not available to employees. With respect to employment income, tax is paid on the gross salary save for a few allowable deductions, with personal tax relief of a measly KShs. 16,896 per annum being the only one that all employees are automatically entitled to.
It is without question that employees incur costs incidental to generating their employment income which are not covered by the employer. Transport to and from places of work, purchase of appropriate work clothes and telephone charges incurred calling the office or clients are some of the costs that employees incur that they do not get any tax credit for. Employees therefore remain heavily taxed mainly because of the ease of collecting tax. The government has become too dependent on this stream of income and has also just recently introduced a new mandatory monthly contribution to the National Housing Development Fund of 1.5% of the employee’s basic salary. This contribution is only targeted at employees and will become effective once appropriate regulations are gazetted.
Employees are clearly overtaxed. To alleviate the heavy burden on employees, the Government needs to introduce meaningful ways of easing the tax burden including widening the tax bands which are extremely narrow. Personal relief based on a reasonable percentage of the gross income needs to be introduced to cater for expenses that employees incur towards earning wages and salaries. Finally the Government needs to expedite the process of including the informal economy in the tax bracket. Initial steps have been taken through Finance Act, 2018 which introduced a presumptive tax which will be paid at the time of obtaining business permits. There is also a move by the KRA to link PINs with bank records which is likely to provide information regarding any untaxed income.
All these are welcome initiatives towards sharing the tax burden equitably but this will not lighten the burden already carried by employees. The measures proposed above should also be taken to ease the burden on employees.
The article was featured in the Business Daily on 1st November 2018 and can be accessed here.